Wondering if you could shed some light on managing positions, especially during this time of market acceleration. I'm finding that I constantly am holding more positions than I can truly effectively manage. So many good stocks are breaking with good patterns that I find I want to take advantage of way too many of these... then I end up with two or three times the number of positions I can really keep my eye on. How do you keep this under control and manage a portfolio. I feel that holding 5 or 6 positions should be plenty and my intentions are fine, then I keep ending up with 15 positions! Any rules for behavior management? (January 5, 2002)
Ah, the problems of an improving market. I fully agree that most investors should avoid investing in a lot of positions; you get to where you are having to compute too many variables at once and you end up making bad decisions because you miss something. What happens is you are like a small mutual fund and you start getting those mutual fund returns - - mediocre. You start missing sell points or covered call sales on your positions because you have too much to monitor.
There are two ways to approach this. First, keep your short list short. Pick the plays that you like the best and then invest in those when they make their moves. As long as they perform as you want or do not turn on you, keep them open and working for you. The problem with that as you have noticed is there are a lot of other plays out there that look good as well, and when one makes a move, you want to run with it. It is very similar to my early days of fishing. I would get in some good-looking water and start to work it; then I would see a fish hit the surface 100 yards away. The impulse is to leave that water you chose as the best and run over to that other area and chase that fish. Problem is, the fish is either long gone or was a carp. Always looking for that greener pasture or better water can take your eye off of what you actually have. That can hurt you just as too many can hurt you.
Focus is the key. Here is what I often do. You recall from many of the Team Trades that we discuss that I often take only partial positions on what I want to own. I don't dump 100% of my allocated funds for an investment right in unless I plan on this being a short trade all along and want to capture a specific move. What I do is take a third or so of a position, maybe half, and then see how it performs. If I have a few that look good, I can get in to all three of them, but spreading my money between them and not using up all of my funds. Then if one outperforms the others, showing good appreciation on good volume, etc., I can close the others and then put more money into that position at the next logical buy point, e.g., a pullback to near term support on lower volume, the break over the next resistance point on strong volume, etc. That way I end up FOCUSING my assets on winners. You cannot pick the one stock that will appreciate the most each time you invest. Cast a bit wider net over some very solid stocks, and then let them run the race for you. Let them show you which is the one stock you want to focus on. That way you concentrate on a winner and you improve your success percentages.
Now many will say this is lunacy, that you are not properly diversified. Well, you picked a handful of promising stocks, and you let them show you which had the bloodline you wanted. You then bought more of that. Averaging up into a stock is how smart mutual funds buy and how nearly ALL of the successful investors I know have made their fortunes. That does not mean you hang onto it forever. You learn when a stock is topping, when it is flashing danger signals: the blow-off top, the double top on low volume, the broken trendline you are investing in. We teach these in the online seminars that are coming up again soon, and when you see them, start taking money off the table. Sometimes it might be all of it, other times you might want to start lightening up on the position just as you were buying into it as it moved higher and hit new buy points. This way it does not matter if you have your assets concentrated in one, two, three or five stocks. If you have them in two stocks and one shows signs of topping, take the gain off the table and slap yourself on the back for a job well done. If it was a false alarm and you still like the stock, you can always start over, taking partial positions at the right time, putting your money in piecemeal when it hits the buy points. It is your money, and it deserves this kind of attention. You give it this kind of attention, and you will do very, very well in this bull market.
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